The Harmful Implications of Illicit Fuel Trade—the economy, the people, the environment

People often ask me what I do for a living. When I state that I manage a business that helps detect and deter illicit fuel trade, most of the time the response is a confused look and the question, “What is illicit fuel trade, and is that really a problem?” My quick answer is that illicit fuel trade is likely the biggest problem that you have never heard of. The first step in tackling this menace is to shed light on its existence and the harm it inflicts on society.

For the past couple of weeks, we’ve produced some different blog posts discussing illicit fuel trade, a major worldwide problem stealing billions of dollars from governments, legitimate businesses, and consumers. “Illicit trade” can be the simple case of outright theft, which is very prevalent in Mexico today, where the state oil company, Pemex, says it lost about $1.6B in 2016 from fuel stolen from over 6,800 pipeline taps across the country. Another scheme of illicit trade is made possible by exploiting the differences in price between fuels or other petroleum products because of tax differences, subsidies, different grades, or product types (e.g., adulteration with non-fuel products such as solvents or waste oils).

Why fuel fraud is hard to detect

In both cases of illicit trade, the execution of the crime is simple – take a lower price (or stolen) product and either mix it with a higher priced product or replace it outright – sell the fuel at full price and pocket the difference. Even small differences in product prices can generate massive returns for criminals due to the sheer volume of petroleum products consumed every day. The crime is further enabled by the difficulty in detecting when it is perpetrated.

What does this mean to you?

Most consumers never see the road fuels that they purchase, and even if they did, an illicit product may look the same as legitimate product. If as a consumer, I unwittingly buy adulterated fuel at the premium price, obviously, I don’t get what I paid for; but it can also damage the engine of my car, reduce my fuel economy, and increase air pollution. The government doesn’t collect the taxes it needs, legitimate businesses suffer from unfair competition, and the reputation of oil marketing company brands may be unfairly tarnished.

At Authentix we believe that a system of fair and open commerce serves as a powerful agent for good throughout the world. When this system is compromised by illicit trade, civil society is weakened. The scope and scale of illicit fuel trade is particularly damaging in this regard – diverting money to organized crime and, in some cases, terrorist organizations, while defrauding governments of tax revenue necessary to fund programs in the service of their citizens. In many cases these taxes are a significant portion of the country’s total tax revenue – any shortfall in collection may necessitate higher taxes in other areas, placing an even larger tax burden on the populace.

The only people benefiting are the criminals perpetuating the crime – and it is BIG business. Our experience in several countries is that the illicit trade rate in the fuel supply chain was over 30% – translating into hundreds of millions of dollars each year lost to criminals in each of these countries.

Time to disrupt the business of illicit fuel trade

Fuel Marking Programs (FMPs) are a highly effective means to redistribute illicit gains away from organized crime and savings toward legitimate businesses and Government, while ensuring consumers get the quality products for which they have paid. In weeks to come, we will dive into FMPs and how we have seen FMPs assist governments in enforcement of policies prohibiting illicit fuel trade. Many of these programs deliver a significant return on investment of usually five to 10x the cost of the program.

I hope you recognize the lasting implications illicit fuel trade has on all of us. Usually after an awakening to how people’s everyday lives are affected, the next question is typically, “Why isn’t every government doing an FMP?” My personal opinion, it’s the same reason that most citizens aren’t aware of the problem and the harm it brings to their community – something we at Authentix are working diligently to change.